Bank of America has agreed to pay a record US$16.65 billion to settle charges it sold flawed mortgage securities in the run up to the financial crisis, the largest fine ever levied by US authorities on a single company.
"This morning we demonstrate once again that no institution is either too big or too powerful to escape appropriate enforcement action by the Justice Department. At nearly US$17 billion, this resolution with Bank of America is the largest the department has ever reached with a single entity in American history," associate attorney general Tony West said.
The bank will pay US$9.65 billion in cash to the Justice Department, six US states and other government agencies, including the Securities and Exchange Commission. A further US$7 billion in aid will go to consumers struggling with home loan payments and towards demolishing derelict properties.
The settlement comes as US prosecutors are preparing a civil lawsuit against Angelo Mozilo, co-founder of Countrywide Financial, the largest subprime lender before the financial crisis. Bank of America bought Countrywide for US$2.5 billion in 2008 and has since paid tens of billions in fines related to it.
The Justice Department's fine comes after a series of similar deals over the mortgage-related conduct of major US banks ahead of the crisis. In July, Citigroup paid US$7 billion to settle its case and last November JPMorgan Chase agreed to pay US$13 billion to end an investigation that alleged it routinely overstated the quality of mortgages it was selling to investors.
Many of Bank of America's issues stemmed from loans originated by Countrywide and packaged and sold to investors by Merrill Lynch.
But there were also problems with Bank of America's own mortgage securities. "Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch and Countrywide sold billions of dollars of RMBS [residential mortgage-backed securities] backed by toxic loans whose quality and level of risk they knowingly misrepresented to investors and the US government," Attorney General Eric Holder said.
The department found that Merrill Lynch knew, "based on its own due diligence, that substantial numbers of the loans it was packaging into RMBS and selling to investors failed to meet underwriting guidelines, did not comply with the applicable law, or were inadequately collateralised," the department said.
"It's kind of like going to your neighbourhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you," said West.